Facebook: Cash Machine Can Provide Value

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(C) Reuters. Facebook: Cash Machine Can Provide Value

I am bullish on Facebook (NASDAQ:FB), as its competitive positioning, strong growth momentum, and reasonable share price make it attractive.

Facebook is the world’s largest social media platform, founded in 2004 by Mark Zuckerberg. The company’s mission is to empower people to build online communities and grow their businesses, bringing the world closer. (See FB stock charts on TipRanks)


Facebook stock has been one of the best performers among the five Big Tech companies, including Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Apple (NASDAQ:AAPL). The company’s stock has risen by 27.5% in 2021, increasing its market capitalization beyond the $1 trillion mark during the first quarter of 2021.

With over 10 million active advertisers, Facebook remains the king of the online advertisement space. The company has shown marked growth during the pandemic, even as many businesses cut down on their marketing.

Recent Results

Facebook’s second quarter of 2021 earnings beat analysts’ expectations as earnings per share more than doubled on a year-over-year basis.

The company’s revenue also exceeded expectations, and was up 56% on a year-over-year basis at $29.1 billion. This was the fastest growth pace of revenue the company has seen since 2016.

Facebook’s monthly active users were 2.9 billion at the end of the second quarter of 2021, showing an increase of 7% year-over-year. The balance sheet remained strong with cash, cash equivalents, and marketable securities of $64.1 billion as of June 30.

Facebook also announced a growth in advertising revenue in the second quarter of 2021, which was driven by a 47% increase in average ad prices, and a 6% jump in the number of delivered ads on a year-over-year basis.

The company added that it expects revenue growth in ads for the next couple of quarters to be driven primarily by a year-over-year increase in ad prices.

In the coming quarters, Facebook expects a slowdown in revenue growth, attributed to Apple’s recent update that allows users to remove themselves from the tracking feature in apps on iOS devices, which Facebook believes will reduce developers’ ability to monetize ads.

Facebook’s earnings momentum is likely to continue in the third and fourth quarters, however, driven by revenue and user growth on its platforms, including WhatsApp and Instagram.

Valuation Metrics

Facebook stock looks quite reasonably priced at the moment. Its price to forward normalized earnings is just 23.7x and the price to forward free cash flow is just 24.4x, both of which are a significant discount to the broader stock market.

Revenue is expected to grow by 19.2% in fiscal 2022, and normalized earnings per share are expected to grow by 13.3% in fiscal 2022, after surging by 39.9% in 2021.

Wall Street’s Take

From Wall Street analysts, Facebook earns a Strong Buy analyst consensus, based on 25 Buy ratings, four Hold ratings, and one Sell rating in the past three months. Additionally, the average FB price target of $421.97 puts the upside potential at 23.4%.

Summary and Conclusions

Facebook is still experiencing very robust growth despite its massive size, and enjoys a stellar balance sheet and world-class moat.

The company is also a free cash flow generating machine, giving it significant optionality in how it acts to create shareholder value.

Meanwhile, the share price remains quite reasonable compared to the broader market, and Wall Street is overall quite bullish on the stock as well.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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Facebook: Cash Machine Can Provide Value


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